Daily Highlights: 7.23.09

• ADB: East Asian economies may have 'V' shaped recovery.
• Asian stocks rise on yen; merging market stocks hit 10-month high.
• IMF says China has room for more fiscal stimulus through 2010.
• Iceland formally applies to join EU, faces talks on fishing rights.
• Japan's export fall by smallest margin in 6 months as recession eases.
• Weaker yen sends Japan stocks higher for seventh straight session of gains.
• Oil above $65 in noon European trading after mixed US investory data.
• Sri Lanka's mulling a US dollar bond that will test investors' appetite for risk.
• Swedish unemployment jumps to 9.8 percent in June, men hit hardest.
• US May Home Prices rise 0.9% vs. previous month: FHFA.
• Allegheny Tech sees Q3 EPS at break-even vs. cons. est. of a profit of $0.24/sh.
• Amazon to acquire online footwear retailer Zappos for ~$847M in cash, stock.
• Bank of New York Mellon's writedowns rose 68% on declines in residential value.
• Bristol Myers Squibb to acquire Medarex for about $2.4B.
• Celera Corp. withdraws 2009 f'cast; expects 2Q sales to decline YoY.
• Chrysler offers car buyers $4,500 cash as US 'clunker' program begins.
• Deutsche Post second quarter net profit falls 71%; sales fall 17%.
• Dutch telecom KPN says Q2 profit rises only 4.8%, sees weak demand.
• Engineering company ABB reports 31 pct drop in Q2 net profit to $675M.
• Fiat to sell €1.25B of bonds at 9.25 percent yield.
• Ford lost $2.8B in June 2009.
• Goldman Sachs pays $1.1B to redeem TARP warrants.
• Hyundai Motor says 2nd-quarter net profit rises 48 percent on China, India sales.
• Intuitive Surgical posted Q2 EPS of $1.62. topping cons. est. by 26 percent.
• Morgan Stanley posted $159M Q2 loss cites conservatism in running its business.
• Pacific Sunwear of California expects 2Q loss of at least $0.22/sh (cons -$0.13/sh).
• Porsche Board agrees to prepare €5B capital increase.
• St. Jude Medical's Q2 net up 14% at $219.34M, revs up 4.3% at $1.18B.
• Tupperware's Q2 net falls 8.1% to $33.1M; sees Y09 EPS at $2.59-2.64, sales decline of 5-7%.

Economic Calendar: Data on Initial Claims, Existing Home Sales to be released today.

Recent Egan Jones Rating Actions:

PEPSICO INC/NC (PEP)
ELI LILLY & CO (LLY)
FREEPORT-MCMORAN COPPER (FCX)
MORGAN STANLEY (MS)
LEGG MASON INC (LM)
ADVANCED MICRO DEVICES INC (AMD)
MERCK & CO INC/NJ (MRK)
CATERPILLAR INC (CAT)
COCA-COLA CO/THE (KO)
BOSTON SCIENTIFIC CORP (BSX)
LEXMARK INTERNATIONAL INC (LXK)
CONTINENTAL AIRLINES INC (CAL)
EI DU PONT DE NEMOURS & CO (DD)

Data Provided by: Egan-Jones Ratings And Analytics

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S&P Commits Professional Suicide With Ratings Round Trip, Underlying CRE Remains Toxic Garbage

Rare? Medium Rare? Medium? Well Done? S&P? Indeed, as the last peg in the gradation of burnt to a crisp, S&P smells completely done. As in there isn't even left a shadow of a doubt that all S&P does is pander to the solicitations of whatever few remaining clients it may have, or, as the case may be, the U.S. government. Any credibility S&P, which one would be excused for confusing with Sycophantic & Pathetic, may have tried to salvage over the past 6 months has been gutted and left to dry after this most recent fiasco, which is the final straw on the McGraw-Hill subsidiary's expedited route to the NRSRO utterly discredited trash heap. From Bloomberg:

Standard & Poor’s backtracked on ratings cuts issued last week and raised the ranking on commercial mortgage-backed debt from three bonds sold in 2007.

The securities, restored to top-ranked status, had been downgraded as recently as last week, making them ineligible for the Federal Reserve’s Term Asset-Backed Securities Loan Facility to jumpstart lending.

S&P lowered the ratings on a class of a commercial mortgage-backed bond offering from AAA to BBB-, the lowest investment-grade ranking, on July 14. The New York-based rating company reversed the cut today, S&P said in a statement. In a related report, S&P said it adjusted assumptions on the timing of projected losses on the mortgages.

“It is a stunning reversal and certainly raises questions concerning the robustness of their revised model,” said Christopher Sullivan, chief investment officer at United Nations Federal Credit Union in New York. “It may engender further uncertainty with respect to ratings outlooks.”

Debt rated below AAA isn’t eligible for the Federal Reserve’s TALF. Investors sought $668.9 million in loans from the Fed to purchase so-called legacy commercial mortgage-backed bonds on July 16, the first monthly deadline to finance the purchase of the securities.

To recap: AAA to BBB- and back to AAA in one week. How many pieces of silver from disgruntled affected CMBS clients (or how many persuasive phone calls from the NY Fed) did it take for S&P to vomit in the face of the few remaining people who had been willing to give the rating agency one last chance at redemption? At this point, nobody cares, just as nobody will ever care again about any bullshit lettering this "rating" agency assigns as an indication of creditworthiness for any entity. For all intents and purposes, undertakers are now shoving S&P's shrivelled carcass deep into the bowels of the credibility morgue where it will remain forever entombed in an unmarked grave, with a final forensic assessment of professional suicide. As expected, nobody will shed any tears of mourning.

Amusingly, S&P's commercial real estate cowardice comes on the heels of a great report issued this morning by CreditSights' REIT analyst Craig Guttenplan titled "REIT 2Q Fundamentals: Protracted Pain Despite Gain." Craig writes:

CRE fundamentals for the core domestic property types continued their downward progression during the second quarter with vacancy rates rising and market rents declining as continuing job losses and other negative economic news weighed on both consumer and business sentiment.

Despite the weakening in fundamentals, REIT security prices have rallied strongly from the beginning of the second quarter to date on the sector’s re-equitization and deleveraging as well as the broader compression trade due to an improvement in overall credit market conditions.

The dramatic upturn in REIT equity during the second quarter underscores how operating fundamentals continue to be a secondary concern to the market’s primary driver of capital markets and liquidity.

And summarizes as follows:

Commercial real estate (CRE) fundamentals for the core domestic property types continued their downward progression during the second quarter. Vacancy rates rose and market rents declined on a national level across-the-board in retail, office, and multifamily as continuing job losses and other negative economic news weighed on both consumer and business sentiment. While this no doubt is negative for the CRE market, it is also not a surprise. CRE fundamentals notoriously lag the economic cycle with their severity and timing driven by how bad the downturn is and how long it lasts.

Surely this alone should be sufficient for S&P to upgrade every CMBS bond possible to AAA and even induct them into the "$1 million sponsor" AAAA club.

In an a dramatic example of what is known as fundamental analysis which in its many years of Simplistic & Parasitic existence S&P never quite got the hang of, Craig provides a very illuminating overview of what is likely the biggest cog in the REIT/CRE/CMBS wheels - expiring leases:

Going along with the consensus view for a near term bottoming of the economic downturn in late 2009 or early 2010, we envision an environment of deteriorating fundamentals that persists through sometime in 2012 or 2013. Given this expectation, we looked at the lease expiration schedule for our retail and office universe to see who is most exposed over this time frame. However, we would point out that the longer duration of these lease types (5-15 years) means that many expiring lease rates are not necessarily going to be significantly lower than when they were originally signed and in certain cases there may still be positive marks-to-market. That said, it is clear that significantly positive marks are no longer going to be the norm or there should at least be some moderation of positive marks relative to more recent periods. For those companies whose portfolios are currently fully marked, lower lease rates should impact revenues more immediately than those with still positive embedded marks.

Despite our expectations for a bottoming of CRE fundamentals in 2012 or 2013, we note that rental rates should remain at depressed levels for the subsequent few years relative to the recent boom period as fundamentals slowly strenghten. So even if a company has a small percentage of its leases rolling during 2009 through 2013, market rents in 2014 and 2015 will likely be lower than market rents in 2006 and 2007 as they recover from their lows. Additionally, while good diversification by most major REITs limits exposure to single tenants, tenant bankruptcies can speed up the lease expiration timetable and force space that was once considered occupied for the longer term back on the market. We note that disclosure around lease expirations can vary by company so our figures are based on what is most readily available in the companies’ quarterly financial supplements.

Needless to say, more reason to upgrade anything and everything that even remotely smells of CRE.

Zero Hedge's advice to Moody's: if you don't want to follow S&P into the NRSRO abbatoir, please run, don't walk to your nearest computer, purchase a CreditSights subscription, and read all of Craig's research pieces on REITs and CRE. Not only will you learn a lot, but you will hopefully avoid S&P's mistake. Alternatively, you can follow in their footsteps, clearing the path for Egan-Jones' unobstructed emergence as the only objective, unopposed, legitimate rating agency in the western world. We await your move with baited breath.

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The Authority On Bonds Is Reason Why Treasuries Did Not Crumble As Equities Popped

From The Fourth Branch Of Government's Secular Outlook, Interest Rate Strategies:

With Treasury yields near the top of our expected range, PIMCO plans to overweight duration and take exposure to the 5-to 10-year portion of the yield curve. However, consistent with our Secular Outlook, we plan to also retain an emphasis on the short end of the curves in the U.S., Europe and the U.K. as central banks are likely to tighten more slowly than markets expect.

Sure, that 10 year at 3.6% is such a bargain. So let me get this straight, equity markets are planning for near hyper-inflation yet Bill Gross is happy to lock in current inflation levels. Presumably someone is wrong: here is our guess who.

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Loans Versus Bonds Relative Value: Week of July 16

The divergence in loan and bonds trends has picked up marginally, with the bond universe wider by 8 bps to 968 bps and loans tighter by 22 to 471 bps. Mostly noise in the subset of 30 companies, except for the traditional yoyo TRW whose bonds and loans both screamed tighter by 410 bps and 130 bps, respectively. Is there any fundamental reason for this? Of course not.



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CIT: L+1000 Bridge Financing

Sunday night edition of America's favorite game: kick the can down the street, better known as "someone else's problem." From the WSJ

The final term sheet still needs to be reviewed by the various financial and legal advisers, said the people familiar with the matter. And there is the chance that a final deal could falter over last-minute negotiations.

Under the proposal, CIT would likely pay interest rates 10 percentage points above the London interbank offered rate, said these people. (As of Friday, three-month Libor stood around 0.5%.) CIT has also agreed to pledge some of its highest-quality loans as collateral on the $3 billion package.

The new loan could act like a "bridge" to a series of debt-exchange offers that CIT would launch in order to get bondholders to swap some of their bonds for equity in the company or for new debt that matures later.

J.P. Morgan would have considered lending if CIT were first to seek bankruptcy protection, but the bank "couldn't get comfortable with a deal outside (bankruptcy) court," said one person familiar with the matter.

CIT's advisers, which includes Evercore Partners, then launched talks with its bondholders, led by investment firm Centerbridge.

You mean after Dana and Extended Stay Centerbridge is still around? And now CIT? Did these guys just buy whatever bonds Goldman was a size seller in?

Also from Reuters:

The $3 billion rescue financing plan will be backed by remaining unsecuritized assets which likely exceed $10 billion, another source familiar with the matter said.

"The $3 billion is new money but securitized by all the remaining unsecuritized assets which probably exceed $10 billion," that source said.

So i) bondholders are screwed either way, ii) the company will pay 10%+ on the bridge instead of paying 3.5% on a DIP, iii) the stock will pop tomorrow only to crash to zero ala GM soon enough, iv) Peek will cash out, and v) in 6 months when chapter 11 is inevitable, the company will suddenly become Too Big To Fail and taxpayers will be on the hook after the bulk of any salvagable value will have been leaked away.

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Asset Diversification Theory Fail

For people who have forgotten what asset diversification looks like, do not look at this chart to be reminded. All asset classes over the past three days have ploughed higher, contrary to any possible logical argument. But such is our market. Cash out of bonds into everything else... inverse... rinse... repeat. One wonders just how much excess liquidity is trapped in the market.

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Morning Bond Charts

The flip flop between equity and credit accelerates. Just as the administration managed to lower mortgage rates enough to get a moderate pick up in refi applications, bonds are starting to get out of control. The equity-bond flip flop is sure to inspire motion sickness for weeks and month as the powers that be attempt to valiantly balance out marginal confidence boosting improvements in 401(k) statements with nominal refinance applications in California foreclosure properties (all the while pretending that spiking commodity prices won't destroy company margins, and that the dollar's programmed crash will permit Europe to export even one BMW to its favorite all-consuming ally accross the Atlantic).

The 10 Year adjusted for inflation swap breakeven:

But we have space for more...With a conveniently higher market baseline from which to drop next time a correction is needed.

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Merrill's RateLab Retorts To Zero Hedge

Zero Hedge's good-natured critique of Merrill Lynch's most recent RateLab issue seems to have circulated. To wit, its author, Harley Bassman had this to say:

Under the rubric of "All P.R. is good P.R....." .......I can add that I have been called worse !

It was brought to my attention by a friend (yes, I do have a few, though they are mostly paid) that our most recent RateLab was commented upon by the website http://zerohedge.com

While allowing for the fact that everyone is entitled to their opinion, I have included below a few of our recent favorite RateLab issues as rebuttal. I might note that they have been reasonably prescient (as well as having a full compliment of "pretty charts").

A few more thoughts:

1) We did NOT state that Black Swans are "just a figment of Taleb's imagination"; we just noted that, by definition, they do NOT travel in flocks.

2) Our suggestion of a 3% to 4% range for T10yr is purely a short-term trading concept. (see Lemony Bonds, attached)

3) I would NOT call someone a Pollyanna for suggesting that markets might contract from a 4 sigma to a 2 sigma risk vector.

Harley, the P.R. works both way, and we appreciate it as well. To elaborate: Zero Hedge, as could be surmised, is an avid reader of RateLab - traditionally a source of much good and credible data. We were, simply, surprised by the recent departure from this "normal." Of course, if, as is probably the case, this was purely a result of Bassman voicing his opinion, then we encourage and support his platform, even if we obviously disagree with the conclusion. We do wholeheartedly agree with Bassman's clarification that the 10 yr UST range should be read as a "short-term trading concept." The question is what happens, who benefits, and who is currently positioning themselves appropriately, for the day when the 10 Yr hits 2.99 or 4.01% (and of course does not stop there). To say there is a lot of capital at stake in a UST dramatic move in either direction is an understatement: with almost $1 quadrillion in interest rate swaps (yes notional, but welcome to the world where notional and net sometime mysteriously meet) outstanding, the day when the the short-term trading concept is no longer valid should prove to be quite "impactful" to many who have put on bets on either side of the trade.

Last point - if Harley is ok, Zero Hedge would be happy to provide its readers with the 4 reports that were attached to the circulated response. As Merrill is not known for being too happy with Zero Hedge's disclosure of the bank's reports, we would do so if we get the author's go ahead - the bottom line is that he does bring up many relevant and interesting points in these reports and they are definitely worthy of a wider audience.

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Loans Versus Bonds Relative Value: Week of July 2

The loan/bond universe was virtually flat in the prior week, with the only major outlier being TRW on the bond side, and Compucom on the loan side. Both universes tightened marginally (-10 bps and -17bps for loans and bonds, respectively), most likely due to the impact of these two main outliers.





Source: LoanConnector Sphere: Related Content

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CIT Prepares To File Bankruptcy

The WSJ reporting that the lender to over 1 million small sized businesses has hired Skadden Arps in preparation of a bankruptcy filing. The formerly largest competitor to GE Capital for any and every semi- and fully-toxic loan imaginable, has been so far outright denied a bailout by an administration that has rarely professed a non-socialist approach to corporate demise. Unfortunately for the company, whose new HQ office lobby on 42nd street looks more like a club out of Meatpacking, flashing either a blue or deep purple colored decor, may be Obama's first Guinea pig in financial failure since Lehman.

CIT Group Inc., a lender to almost a million mostly small and midsize businesses across the country, is preparing for a possible bankruptcy filing after so far failing to win a government guarantee to help it borrow, said people familiar with the matter.

CIT declined to comment on whether it was preparing a filing or why it had retained Skadden Arps. But if CIT did file, the consequences could be considerable, because the 101-year-old company, as of March 31, had $68 billion of liabilities.

A bankruptcy filing by CIT could affect thousands of small borrowers, from Dunkin' Donuts franchisees to restaurant owners andclothing retailers. "If CIT were to go away, it would take a financing option away from franchisees who want to buy stores or expand their networks," said Kate Lavelle, chief financial officer of Dunkin' Brands, the which owns Dunkin' Donuts and has had a 50-year relationship with CIT.

On Friday, many CIT bonds slumped on heavy trading, and its stock tumbled to its lowest since the lender went public in 2002, further hurting its chances of raising capital from the private sector without more government aid. CIT bonds that mature in February 2010 were trading at 83.5 cents on the dollar and yielding over 40%, indicating that debt investors think it is unlikely they will be repaid in full. CIT shares sank 33 cents, or 18%, to $1.53, after dipping as low as $1.13 during the day.

According to confidential documents reviewed by The Wall Street Journal, CIT has in recent weeks tried to assess the consequences of a failure of the lender on Middle America. Among them: Companies would lose access to $4 billion in untapped credit lines and thousands of manufacturers could run into problems.

If "run into problems" isn't the most greenshoot colored euphemism for a virtual halt in credit line access for small and medium corporations (that nobody really even wants now in the first place), I don't know what is. However, as in the Lehman failure, the CIT bankruptcy will merely expose the thousands of unintended consequences that the government, in its newly minted centralized planning role, has no possible way of fully evaluating, and the pain could likely be as pervasive and acute as last September.

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Intraday Observations

It is odd that over the past 5 days the headlines have been dominated by computer-related events: from program trading fiascoes at Goldman over the weekend, to what seems to be a full scale assault against US governmental and market infrastructure. I have relished in the amusement of Sky Net derived jokes, but this is starting to get all too real. From Yahoo Finance:

The powerful attack that overwhelmed computers at U.S. and South Korean government agencies for days was even broader than realized, also targeting the White House, the Pentagon and the New York Stock Exchange.

An early analysis of the malicious software used in the attack found its targets also included the National Security Agency, Homeland Security Department, State Department, the Nasdaq stock market and The Washington Post. Many of the organizations appeared to successfully blunt the sustained attacks.

The Associated Press obtained the target list from security experts analyzing the attack. It was not immediately clear who might be responsible or what their motives were.

The attack was remarkably successful. Some of the affected government Web sites -- such as the Treasury Department, Federal Trade Commission and Secret Service -- were still reporting problems days after it started during the July 4 holiday.

Obviously, especially as pertains to the capital markets, the greater the reliance on computer models and algos in our daily lives, the greater the risk that sooner or later someone will find a big gaping hole that the countermeasure experts haven't caught yet, and one can only imagine the possible abuse that would result. Visions of the Mac guy attempting to prevent a huge Firesale, however without Agent McLane at his side, emerge.

In other news, Morgan Stanley is hoping to take advantage of the short bus and irrational exuberance yet again, by repackaging a bunch of crappy loans into what will certainly be a doomed attempt at restarting the securitization bubble. From Bloomberg:

Morgan Stanley plans to repackage a downgraded collateralized debt obligation backed by leveraged loans into new securities with AAA ratings in the first transaction of its kind, said two people familiar with the sale.

Morgan Stanley is selling $87.1 million of securities that it expects to receive top AAA ratings and $42.9 million of notes graded Baa2, the second-lowest investment grade by Moody’s Investors Service, according to marketing documents obtained by Bloomberg News. The bonds were created from Greywolf CLO I Ltd., a CDO arranged in January 2007 by Goldman Sachs Group Inc. and managed by Greywolf apital Management LP, an investment firm based in Purchase, New York.

Not really much to say there: if investors into this "AAA" security are willing and eager to throw away their money, so be it. MS' persistence is impressive: if the offering is successful, expect the firm and other investment banks to take CDO^2 and repackage their "riskless" tranches into yet another conduit. While the paperwork is already likely in progress in the bowels of 1585 Broadway, the only question is what will this Frankensteinian aberration be named: CDO Quadratic sounds just a little better than CDO Square Squared. McKinsey is likely already providing its extensive appelation consulting skills... in exchange for a handsome fee. Probably the true name "Yet More Soon To Be Phenomenally Uber-Toxic Crap" has not surfaced quite yet.

Let's see what else - Meriwether has blown up his Nth hedge fund....the IMF keeps drinking the Kool Aid... and the market keeps going down. We now have a good 10% retracement from the highs. If Bob Pisani is right, this should be just the opportunity for all the quadrillions in cash on the sidelines to jump in. Many are not holding their breaths.

Lastly, and somewhat most peculiarly, Jean-Pierre Aguillard (together with his co-pilot), died in a freak glider accident over the weekend. Many have not heard of Aguilard: it may be surprising for people to learn that he is the French equivalent of Jim Simons, as his firm Capital Fund Management, with $2.7 billion in assets, is one of the largest French hedge funds and at the forefront of electronic and program trading. Curiously, CFM was in the news as recently as on April 22, 2009, CFM replaced its legacy market data distribution system with NYSE Technologies' Market Data Platform at its New York and Paris operations. In fact Automated Trader has quite an in depth article on what happened a mere two months ago in an article titled "Capital Fund Management selects NYSE Technologies for new electronic trading platform."

NYSE Technologies has announced that Capital Fund Management (CFM), the French private hedge fund, has licensed its high-speed real-time market data distribution and integration software.

CFM has replaced its legacy market data distribution system with NYSE Technologies' Market Data Platform at its New York and Paris operations. NYSE Technologies’ sub-millisecond feed handlers and high performance Middleware Agnostic Messaging API (MAMA) deliver data to CFM’s trading systems, which handle 100% of the firm’s order flow electronically.

Jacques Sauliere, Chief Operating Officer at CFM, commented, “Since we connect to all major US, European and Asian markets, NYSE Technologies was the clear choice considering the breadth of coverage available through its extensive range of feed handlers, its cutting-edge market data distribution platform and comprehensive value-added services.”

NYSE Technologie will provides CFM with connectivity to a mix of direct market data feeds including NYSE OpenBook, NYSE ARCA Options, NASDAQ ITCH and CME Multicast. This is complemented with connectivity to a vendor consolidated data feed. Sauliere explains, “The consolidated datafeed serves as a back-up, providing the optimal mix of resilience and coverage needed for CFM’s global trading operations.”

Sauliere adds, “During the implementation phase, NYSE Technologies provided us with the ability to work alongside our existing middleware vendor while we transitioned to our new low-latency platform. We were able to consolidate our use of APIs by using its middleware API and write all of our applications to MAMA with the ability to upgrade our middleware in line with technology advances.”

In addition, CFM also uses NYSE Technologies’ Data Access and Reporting Tools (DART) Entitlements to control user and application access to the market data feeds and report on unused or underused market data services. Other value-added services include performance monitoring and a real-time tick capture adapter that consumes data from any industry standard or ODBC database for post-processing of internal data.“CFM is a pioneer in the adoption of pure electronic trading systems generating value for their investors. Being trusted with their business in New York and Paris is something we’re extremely proud of and validates our strategy in serving the buy-side,” said Stanley Young, CEO of NYSE Technologies and Co-Global CIO of NYSE Euronext.

“CFM’s enterprise deployment firmly secures NYSE Technologies as the partner of choice for connectivity, transaction solutions and data management services at the world’s largest and most active trading firms and leading markets.” (highlights mine)

Zero Hedge extends its condolences to Aguilard's family. We, of course, hope that the fund's recent close entanglement with the NYSE for program trading facilitation and the loss of the fund's CEO are purely coincidental, especially in these difficult times for the integrity of program trading courtesy of Goldman Sachs' recently disclosed scandals.

hat tip Jeffrey and ewing2001 Sphere: Related Content

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Thoughts From Rosie And Taibbi

The logical follow up to Rosie's earlier CNBC appearance is the teaser from his "Snack With Dave" email sent out to Gluskin Sheff clients. For the full body, we suggest readers apply for a free subscription to all of Rosie's musings.

We heard at the market lows in March 2009 that the stock market had sunk to Armageddon levels. We have often thought about that because we can certainly understand that at the 2.0% lows on the 10-year Treasury note yield, we had gone to a place we had not seen in over five decades. Also, with Baa spreads north of 600bps, we could see that corporate bonds had moved to levels not seen in seven decades as well.

But this notion that we had moved to Armageddon lows in equities does not seem to hold water. After all, the forward P/E multiple on the S&P 500 at the lows was 11.7x. That was not a multi-decade low or some massive standard-deviation figure — we were actually lower than that at the October 1990 lows when the multiple was 10.5x and frankly, coming off the 1987 collapse, the forward P/E had compressed to 9.8x. As it now stands, the multiple is back very close to where it was at the October 2007 market high, when the multiple had expanded to 15.0x. The range on the forward P/E over the last quarter-century is between 9.8x and 21.8x (excluding the tech bubble), so at 14.5x currently, it is hardly the case that this market can be viewed as a bargain.

On a trailing earnings basis, the P/E multiple has actually widened, from 17.0x at the lows to 23.3x currently, a huge multiple expansion. At this stage of the 2003 recovery, the multiple hardly expanded at all, earnings were driving the rebound; coming off the October 1990 lows, the multiple expansion four months into the rally was closer to 2x and the powerful surge in the post-1982 recovery saw a 3x multiple point expansion at this juncture — not 6x!

As an aside, with the U.S. government now putting its fingers into more than one-third of the economy (health, finance, autos, energy, housing), one would expect that the fair-value multiple in the future will be lower than it has been — given the implications for productivity and the potential non-inflationary growth potential.

Also, Matt Taibbi is slowly emerging from the post article vacuum: his first written interview since the GS piece, compliments of Wall St. Cheat Sheet. Some excerpts:

Damien: The last word I wrote after I finished reading “The Great American Bubble Machine” was ‘Leviathan’. Since you’ve done some great research covering Wall Street and Washington, do you know of policy tools we can use to dismember what you affectionately called the “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”?

Matt: I interviewed a government regulator for my previous piece [“The Big Takeover”] who said state regulators already have enormous power. The state banking commissions or insurance agencies, SEC, or the Office of Thrift Supervision can simply write a letter to these banks and say, “You won’t exist tomorrow unless you …” or, “You’re not going to get government funding unless you do this.”

So, they already have enough power to correct all the problems people are worried about. The problem is getting the appropriate people to staff those bureaucracies. If enough people put pressure on members of Congress and the President to appoint the appropriate people, then we should solve most of these issues. I’m not sure what new policy initiatives would be needed. I just think we need new people.

Damien: Do you believe the citizenry can put enough pressure on our legislators, or are we the sheeple who are too confused, ignorant, or entertained to affect change?

Matt: The real problem is people aren’t organized enough to make it worth the while of politicians to pay attention to ordinary people. The disadvantage the average Joe has against Goldman Sachs is Goldman can concentrate its campaign contributions in its favor. The typical politician is not going to upset or alienate the five most powerful investment banks because he knows realistically he will jeopardize 30% or 35% of his next election cycle’s contributions. On the other side, there isn’t a way for the average person to organize and deny these politicians the money they need to get reelected. So, until we solve the campaign contribution problem, we won’t have the legislative tool to rebalance the power.

Damien: So are we living in a Catch-22 where we have to choose between the Goldman Leviathan sucking the world’s wealth from loopholes or the omniscient eye at the top of the governmental pyramid which becomes the one crown reigning over us all?

Matt: It’s pick your poison. But before we can even worry about the international government question, we have to start at home with our own country. We have to start by protecting the citizens of our country. Even in the United States, Goldman is allowed to get away with things they shouldn’t be allowed to get away with. If we can tighten up and enforce the rules here, we will be much better off before even looking at the international issue.

Damien: Most powerful institutions such as the Federal Reserve and Vatican dismiss most criticisms as “fringe conspiracy theory.” Why should the average citizen not dismiss your claims against Goldman as fringe conspiracies about bankers or Jews?

Matt: That was the tactical criticism I got from Goldman who said to the media, “Next thing you know he’s going to blame us for the Kennedy assassination and say we faked the moon landing.” But if you pay attention to all the criticisms they are leveling, it’s what we call in this business a “non-denial denial.” When people respond by calling names and changing the subject, it means they don’t have any issue with the factual allegations in the article. So, in response to being called a conspiracy theorist, the fact is they are resorting to the rhetorical non-denial denial shows they don’t have any real basis to criticize the facts in the article. The article speaks for itself and the fact they don’t have substantive issues with the piece is highly revealing. In fact, before the article went to print I was extremely nervous we had gotten something wrong and Goldman would come out with a whole list of things they’d say we made mistakes about. But the fact that they didn’t come up with a single thing greatly emboldens me to think we got it right.

Good reading. Sphere: Related Content

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REIT Liquidity Update: Hold The Applause

If anyone had told us a year ago that Fitch would at least attempt to be a voice of reason, while Merrill Lynch, which has gotten destroyed on real estate, would be a CRE permabull, we would have punched them in the face. Alas, this seems to have become the case. While readers are all to aware of Zero Hedge's coverage of the Merrill REIT team's follies in "analysis land", a Fitch piece from last week has some surprisingly insightful commentary on REIT. In a report titled "U.S. Equity REIT Liquidity Update: Hold the Applause" the rating agency paints a much more detailed and credible picture than i) expected and ii) than the 20 brand new analysts at ML/BofA could come up with.

From the report:

Challenges remain, including:

• Tenuous financing available across the capital markets.

• Deteriorating performance in commercial real estate and the sizable overhang of debt maturities for equity REITs looming in 2011.

• Limited visibility regarding net operating income capitalization rates, which continues to stress commercial property values constraining the magnitude of institutional investor-secured debt lending volume.

Also included is a pretty extensive laundry list for all the companies out there who still have not used ML's magical stock underwriting services.

• Likely Reduced Revolving Credit Facility Commitments: Most REITs’ unsecured revolving credit facilities mature beyond Dec. 31, 2010. Within the tables on page 47, Fitch has reduced the borrowing capacity under revolving lines of credit by 33% for REITs that have revolving lines of credit that mature before Dec. 31, 2010 after taking into account extension options for illustrative purposes. This capacity reduction reflects a “what if” scenario for certain REITs as revolving credit facility maturities approach. While a limited number of REITs have either recently extended or increased the borrowing capacity under such revolving facilities, Fitch believes that many of these facilities will be reduced in size. For its rated universe, Fitch does not believe that many of these facilities will be converted from unsecured to secured given the strong lending relationships most of the seissuers have with their banking groups. That said, for weaker issuers across the equity REIT universe, the prevalence of secured credit facilities will likely increase given banks’ limited capital and concerns regarding borrower credit.
  

• Limited Unsecured Bond Issuances: Recent unsecured bond issuances do not constitute a panacea for REIT liquidity, as the unsecured bond market remains unattractive to most equity REITs. Credit spreads have tightened, but indicative pricing across the industry remains unattractive to many companies, particularly relative to secured debt.

• Near-Dormant CMBS Market: Liquidity remains weak in certain areas such as secured funding in the commercial mortgage-backed securities (CMBS) market. Although the inclusion of legacy CMBS for eligibility under the Federal Reserve’s Term Asset Backed Securities Loan Facility beginning in July may play a role in the restoration of investor confidence in commercial real estate, CMBS issuance volumes are highly unlikely to be restored to pre-2008 levels.

• Reduced Bond Tender Activity: While $2.8 billion in bond tender offers executed year to date have allowed companies to reduce uses of liquidity, such transactions have been a byproduct of bonds trading at discounts to par, which have included securities issued by REITs with below-investment-grade issuer default ratings (IDRs). Spreads have tightened recently, shrinking the arbitrage opportunity bond tenders present.
  

• Uncertain Common Equity Issuance: With $12.4 billion in new equity raised year to date by REITs, the re-equitization wave has enabled REITs to strengthen their capital bases. However, investor demand may be driven in part by low share prices relative to net asset values, while share prices of certain other equity REITs are such that prospective equity issuances are unlikely.

And some more good insight:

Encouraging Signs Are Not Ubiquitous

Year to date, 18 REITs have launched tender offers to repurchase approximately $7.0 billion of outstanding bonds and have tendered for approximately $3.1 billion of securities. Many REITs that have launched tender offers have IDRs in the ‘BBB’ rating category. Fitch’s ratings for REITs that have launched tender offers range widely, from Public Storage (which has an IDR of ‘A’ by Fitch, with a Stable Rating Outlook) to Centro NP LLC (which has an IDR of ‘CCC’ by Fitch, with a Negative Rating Outlook). Fitch views consummated tender offers as encouraging in that they demonstrate REITs’ ability to reduce their future funding obligations and temporarily reduce cash interest expense by utilizing low-cost unsecured lines of credit. Such tender offers have been affected by REITs with capacity under their credit facilities. REITs that have not executed tender offers may have limited liquidity to launch tender offers, while others have shorter tem funding needs to address.

Similarly, the equity issuance wave has been encouraging for REIT liquidity, as year to date, 38 REITs have raised an aggregate of approximately $12.8 billion in proceeds. With certain companies reluctant to issue at these prices

It will be interesting what everyone will be saying about REITs in a few months when the impacts of the recent hotel bankruptcies start reverberating through the system, and the full scale of the massive overhang of excess inventory in major metropolitan areas become fully flushed out. Sphere: Related Content

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Daily Highlights: 7.1.09

• Consumers' confidence in economy unexpectedly falls in June, halting a 3-month upward trend.
• Dow Jones industrial average rose 11% during the quarter, while the S&P 500 index surged 15.2%.
• FDIC to propose tough guidelines for PE investors seeking to buy failed banks.
• Home prices fall 0.6% as rate of decline slows.
• IMF’s board of directors plans to issue as much as $150B of bonds.
• Japan’s largest manufacturers rose less than estimated in June, signaling the economy may be slow to recover.
• ANZ says to seek RBS assets in Hong Kong and Singapore.
• US Home Prices fall 0.6% as rate of decline slows; June Consumer Confidence falls to 49.3 vs 54.8.
• Bank of New York Mellon Corp. acquires minority stake in International Derivatives Clearing Group, a unit of Nasdaq.
• BG Group pays $1B for stake in Exco Resources' shale-gas assets in Texas.
• Chrysler cash losses 'slowed down' after restructuring: CEO Marchionne.
• Exelon Corp. cancels plans for now to build a New nuclear plant in Texas.
• Fifth Third Bancorp completed sale of a stake in its processing business, adding $1.2B in Tier 1 common equity.
• Freddie Mac to name Charles E. Haldeman Jr. as its new chief executive.
• Gannett to cut between 1,000-2,000 jobs out of its 41,500-work force in response to continuing newspaper revenue declines.
• Mizuho Financial Group will raise as much as 655B yen ($6.8B) from selling shares after local and overseas investments depleted capital.
• Oshkosh wins $1.05B contract for blast-proof trucks: Pentagon.
• Pfizer said it discontinued phase 3 trial of its Sutent cancer drug.
• Porche's €1.75B loan request rejected by KFW Group.
• Sealy Corp. swings to a loss in Q2 of $5.2,m as revs fell 20% to $298.5M.

Economic Calendar: Data on Construction Spending, ISM Index, Pending Home Sales, Crude Inventories, Auto Sales to be released today.

Earnings Calendar: STZ, DMAN, GIS, LNN, UNF, UNFY.

Recent Egan-Jones Rating Actions:
HERSHEY CO/THE (HSY)
ARCHER-DANIELS-MIDLAND CO (ADM)
KING PHARMACEUTICALS INC (KG)
HOSPIRA INC (HSP)
H&R BLOCK INC (HRB)
ASHLAND INC (ASH)
TRW AUTOMOTIVE HOLDINGS CORP (TRW)
KIMBERLY-CLARK CORP (KMB)
HJ HEINZ CO (HNZ)
MICRON TECHNOLOGY INC (MU)
MCCORMICK & CO INC/MD (MKC)
LENNAR CORP (LEN)
CONAGRA FOODS INC (CAG)

Data provided by: Egan-Jones Rating Action Sphere: Related Content

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Raiffeisen Bank Pulls Exchange Offer

It was only a week ago that we were conjecturing about the prospects for Austrian mega-bank Raiffeisen. This being Zero Hedge of course, we came to the conclusion that the prospects were not that hot. Some readers vehemently disagreed. Maybe news today out of RZB will make them a tad less skeptical: the bank announced that it was scrapping the exchange offer without providing much of a reason.

Among some percolating speculations as to the reason why are:

1. Complete lack of investor interest
2. Concerns about what would happen once the lack of interest is made public
3. Trouble with accountants
4. rating agency getting back to the bank that this would be treated as a distressed exchange (as Zero Hedge speculated), putting the company into an Event of Default.

Then again, the real reason is probably much more innocuous, and has to do with the bank discovering a buried gold treasure in its back yard which will be used to satisfy the several hundred billion in toxic assets as a result of chicken coups built in Transylvania at a 180% LTV (in a JV possibly with GE Capital).

And in order to bring even more seriousness to this grave situation, I present Google's erudite translation of the German text provided by RZB to explain the exchange offer pull (about as legible as the 2930 line, non-broken sentence from the latest MGM Grand indenture).

RZB Finance (Jersey) IV Limited announces the withdrawal of the exchange offer the EUR 500,000,000 Non-cumulative Subordinated Perpetual Callable Step-up Fixed to Capital Floating Rate Notes (ISIN / Common Code XS0253262025/025326202) to RZB Finance (Jersey) Limited IV invited on 18 June 2009 to holders of the above.

Debt, the existing debt into new "Non-cumulative Subordinated Perpetual Callable Fixed to Floating Rate Capital Notes "to the issuer exchange offer (the" Exchange Offer "). The Exchange offer was based on the conditions of the Exchange Offer Memorandum of 18. June 2009. The new bonds were, as the existing Bonds, with a supporting statement of the Raiffeisen Zentralbank Österreich AG (RZB) equipped.

RZB Finance (Jersey) IV Ltd., the offerings of the investors who Debt exchange, which in the course of the exchange offer who has not accepted and the offer was withdrawn. This publication is in conjunction with the Exchange Offer Memorandum on read. The holders of the bonds is recommended that further details and information about the Exchange Offer Exchange Offer Memorandum on note.

In connection with the exchange offer were BNP Paribas and UBS Limited as Dealer Managers and Lucid Issuer Services as mandated Exchange Agent, RZB acted as co-dealer managers and Lucid Issuer Services Limited as Exchange Agent.

Any further questions please contact the Dealer Manager.

NOT FOR PUBLICATION OR DISTRIBUTION TO U.S. PERSONS OR IN THE UNITED STATES OF AMERICA OR IN ITALY.

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Loans Versus Bonds Relative Value: Week of June 25

As expected last week, the tide in credit is turning. The average loan was 5 bps wider, while toxic bonds, just like that scene in Indiana Jones and the Temple of Doom, are starting their descent back into hell, wider by 78 bps on average, and just 23 bps away from the critical 1,000 bps threshold (after being at 895 bps last week).

Also, to see what a schizophrenic yoyo game even credits have become compare the Neiman Marcus and TRW bond spreads (wider by about 500 and 850 bps, respectively). Compare the TRW action from the current week with that from May 28. Lunacy.

While everyone now knows that the equity market is a manipulated, East Setauket fat-fingered joke (Dow going vertical on more bad news today? enough already), seeing credits act as irrationally should bring many a tear to the eyes of any seasoned credit trader.



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Here Comes Russian Bank Nationalization

You didn't think we could beat the original communists at their own game now, did you.

Monetizing proletarians of the world - unite.

Developing story from FT. Maybe Bernanke can monetize some of Russia's upcoming trillions of bonds for shits and giggles too.

"Russia is considering a banking bail-out that will go further than measures taken by the US, as fears grow that bad loans could paralyse the economy."

Igor Shuvalov, deputy prime minister, will consider taking stakes in troubled banks when a group of experts on the crisis meets on Friday to discuss ways to recapitalise the country’s banking system, according to a draft proposals seen by the Financial Times.

The proposal, one of several under consideration, would see the government issue OFZ treasury bills, a type of bond, to boost the balance sheets of the biggest banks. In return the state would get preferred shares. Unlike the US bank bail-out, the Russian scheme would see the government take board seats and get veto rights at the banks it bails out

Analysts said such a plan could allow banks to declare the true level of bad loans on their balance sheets, which, once cleaned up under the programme, would break the credit squeeze and allow them to start lending again in 2010.

About $100bn (€72bn, £61bn) in domestic loans fall due by the end of the year and the central bank has said banks’ profits would be totally wiped out if non-performing loans hit 10 to 12 per cent. Standard & Poor’s warned last week problem loans could reach as high as 38 per cent.

With inflation, high interest rates, a dearth of new credit and a sharp fall in commodity prices still squeezing companies, bankers say they fear non-performing loans could hit as much as 20 per cent of overall credit portfolios by the end of the year.

International ratings agencies Moodys and S&P have warned that Russia could need to spend as much as $40bn recapitalising the banking system by the end of the year.

Under the draft bill being considered on Friday the prefs would be convertible into ordinary shares in 10 years’ time should the bank be unable to pay back the bond when it matures in 2019. The recapitalisation funds would be limited to the top 55 banks in Russia’s 1,100-strong banking system, analysts said. The draft bill says only banks with a minimum of Rbs50bn ($1.6bn, €1.4bn, £1.0bn) in assets would be eligible.

***

If the government continues to delay, “this means that many banks will just stop operations. They will continue to exist but they won’t be able to provide new loans,” Ms Orlova said.

The government fears it could spend its entire Rbs4,000bn reserve fund and more, once it begins to recapitalise the private banking sector, she added.

But Yevgeny Gavrilen­kov, chief economist at Troika Dialog, the Moscow investment bank, said it would be best if the government did not attempt to interfere in the problem but concentrated on lowering inflation instead.

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Intraday Credit Observations

People using "negative" proceeds from buying stuff to buy other stuff... Yes, one of those rare days where the money just comes out of nowhere and buys stocks, commodities, f/x and bonds all up at the same time.

So here are the results of magical money growing on trees:

10 Year UST:



30 Yr FNMA coupon (mortgages):



Major curve flattening:

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Frontrunning: June 24

• State Street, which is underweight bonds, sees Treasuries at 4.5% in 6-12 months (Forbes) [State Street is also underweight shorting]
  
• Swiss Franc drops on speculation SNB sold currency to curb gain (Bloomberg)
• Fears of big bank problems return (Fortune, h/t Jonathan)
• Green shoots lunacy is back: durable goods allegedly imply recession weakening (Bloomberg)
• Italy economy minister says bank lending remains an "open issue" (Forbes)
• Citi, BNP have biggest exposure to $6.3 billion in Saudi debt workout (Bloomberg)
• Bundesbank sees increasing risk of deflation (Traders Community)
• Legg Mason calls it: the worst financial crisis (Footnoted)
• Conflict for Cuomo emerges: AG's money manager received funds linked to pension scandal (Bloomberg)
• Mortgage bombs, quiet for now, await the next boom (Bloomberg)
• Risk of large drop prompts stock hedging according to Morgan Stanley (Bloomberg)
• UK said to push for bank revamp of investment arms (Bloomberg, h/t Steve)
• Tightening credit puts a squeeze on on business owners (LA Times)

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The Relationship Between Bonds And CDS Spreads

As many readers have been requesting data on both intro and intermediate CDS topics, I am posting a paper on one of the most fundamental credit derivative concepts: how to equate CDS pricing levels with those of cash bonds. As new concepts emerge, more explanatory information will be provided. Enjoy the paper - compliments of Maiden Lane I.

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